Mega Company believes the price of oil will increase in the

Mega Company believes the price of oil will increase in the coming months. Therefore, it decides to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil.

On November 30, 20X1, Mega purchases call options for 11,000 barrels of oil at $32 per barrel at a premium of $2 per barrel with a March 1, 20X2, call date. The following is the pricing information for the term of the call:

The information for the change in the fair value of the options follows:

On March 1, 20X2, Mega sells the options at their value on that date and acquires 11,000 barrels of oil at the spot price. On June 1, 20X2, Mega sells the oil for $36 per barrel.

Required:
a. Prepare the journal entry required on November 30, 20X1, to record the purchase of the call options.

Date	Spot Price	Futures Price (for March 1, 20X2, delivery)
November 30, 20X1		$	32			$	33
December 31, 20X1			33				34
March 1, 20X2			35

Solution

S. No. Date Accoutn Tittle Debit Credit a. 30/11/2001 Purchase Call options $22,000.00 Cash (11000*$2) $22,000.00 To Record Purchase of Call option